We often read that we live in an increasingly polarised society, retreating too easily into digital echo chambers, inhabited only by like-minded souls. We also see divided opinions in the financial sector, such as over the adoption of technology innovations. When assailed on either side by fierce optimists and implacable sceptics, the pragmatist will remember that any new platform multiplies its chances of success by attracting a large and diverse range of participants.
Among the new technologies being explored, the crypto asset space is perhaps the most controversial. Certainly, it has earned many column inches, from Bitcoin’s surges in Q4 2017 and Q3 2019 to Libra’s recent launch. True believers see a revolution, in which crypto assets will sweep away centralised financial institutions and market infrastructures, with the immutability of permissionless networks guaranteeing security and transparency in a fair, equal and largely self-regulated environment. Meanwhile, sceptics ask whether smart contracts, crypto assets and blockchains will ever go mainstream, noting the failure of many projects that have proved harder-than-expected to deliver.
There is a third way between the zealots and the naysayers of the crypto-debate. After all, robust business models flourish not in echo chambers, but in response to market feedback. Fnality’s value proposition – that post-trade settlement risks and costs can be reduced markedly through payment-on-chain on decentralised market infrastructures – is often debated by investors and counterparts, and also in industry forums. I took part in such a panel discussion on decentralised systems last month at the fifth annual P2P Financial Systems International Workshop, which was organised by the European Central Bank and the Centre for Blockchain Technologies of UCL.
Our contention is that permissioned, decentralised networks offer significant value to financial markets participants looking to drive new revenues and efficiencies via peer-to-peer capabilities. It is based on two key observations. First, our industry is among the most regulated in the world for very good – and permanent – reasons, even if, as regulators often claim, they want to encourage new models and technologies. This complex regulatory environment partly explains the time it takes to leverage innovations, but also challenges the purists among crypto asset advocates. Turning a blind eye to regulatory requirements will never be a viable business proposition. One need only look at responses from data privacy, consumer protection, anti-money laundering and financial stability regulators to Libra to realise ‘light-touch’ regulation is not an option.
The second observation is that decreased profit margins of banks today means they must deploy new technologies and indeed business models to reduce costs and achieve sustainable, long-term returns. The risks and costs inherent in the inefficient processes on which the financial markets have traditionally run are no longer acceptable.
The financial institutions that have invested in Fnality know liquidity management and settlement processes must take a quantum leap to rein in the current inefficiencies, market fragmentation and counterparty risks. These banks accept the need for change and are exploring the potential of technology, by holding tokenised assets on a blockchain to trade and settle with near-instant finality. Decentralised, peer-to-peer platforms can bring multiple benefits to the post-crisis financial markets, for example freeing up liquidity in the fixed-income markets. There is much greater potential to be explored – with the important caveat that regulatory priorities must be accommodated.
I enjoyed the panel discussion and welcomed the opportunity to put my case before peers for open, diverse and ultimately pragmatic platform models – and accept the different views expressed by fellow panelists and delegates. Only by sharing ideas and experiences can we come up with the optimal solutions that can provide long-term, sustainable answers to the industry’s common challenges.
